Freight customers

2 October 2017

Chair: John Larkinson, Director RME ORR Freight Customer Panel

Freight Customer Perspective

Maggie Simpson 2 Oct 2017 Reminder of a changing rail freight sector.

2013/14 Market Share

- Coal: 35%
- Domestic intermodal: 27%
- Construction: 16%
- Metals: 8%
- Oil and petroleum: 6%
- International: 2%
- Other: 6%

2016/17 Market Share

- Coal: 8%
- Metals: 9%
- Construction: 25%
- Domestic intermodal: 39%
- International: 2%
- Oil and petroleum: 7%
- Other: 10% Growth continues in key markets

Construction Up 7%

Intermodal Up 6% New customers are using rail. Stable charges in PR18 (and PR19)

Dutch rail freight industry pleas for lower track access charges

Published on 26-09-2017 at 10:20

In line with plans of neighbouring Germany to halve track access charges as soon as next year, Dutch rail freight parties are asking their government to take similar measures, instead of pushing plans to increase the cost of using railway in 2019-2020. A petition with this demand was published last week and has received considerable support from within the industry. Effective Regulation of Network Rail Regulation of other infrastructure

(HS2, East-West etc.) Franchising and Access Decisions Implications of Brexit Safety Thank You

maggie@rfg.org.uk www.rfg.org.uk @railfreightuk PR18 charges and incentives update

2 October 2017

### PR18 changes to Network Rail’s charging structure

- **Headlines:** simplification and targeted reforms to recovery of fixed network costs

| Type of operator | CP5 Charging Structure | CP6 Charging Structure | |------------------|------------------------|------------------------| | **TOC** | Mark-ups | Station LTC | Mark-ups | Station LTC | | Recover Fixed Costs | VUC | EAUC | VUC | EAUC | | Recover Variable Costs | EC4T | CC | EC4T | CC | | **OAO** | Mark-ups | Station LTC | Mark-ups | Station LTC | | Recover Fixed Costs | VUC | EAUC | VUC | EAUC | | Recover Variable Costs | EC4T | CC | EC4T | CC | | **FOC** | Mark-ups | Station LTC | Mark-ups | Station LTC | | Recover Fixed Costs | VUC | EAUC | VUC | EAUC | | Recover Variable Costs | EC4T | CC | EC4T | CC |

- **Mark-ups:**

  - **Capped**
  - **Capped**
  - **Capped**
  - **Capped**

- **Capped?**

  - **VUC**
  - **EAUC**
  - **EC4T** Freight Variable Charges

Our decisions to date have focused on:

- Not making fundamental changes to the design of charges; and
- Simplifying the regime

| No fundamental change | Purpose | |-----------------------|---------| | VUC - £44m | Recovers maintenance and renewal costs that vary with traffic – track, signaling and civils. | | EAUC - £0m | Recovers maintenance and renewal costs that vary with traffic – electrification assets. | | EC4T - £5m | Recovers the costs of providing electricity for traction purposes |

| Remove Charge | Purpose | |-----------------------|---------| | Coal Spillage Charge - £1m | Recovers the cost of coal spillage from freight operators transporting coal. | | Capacity Charge - £3m | Recovers Network Rail’s Schedule 8 costs that vary with traffic. |

All figures relate to 2016/17 amounts While PR18 will not fundamentally change the design of the VUC there is upward pressure on costs that feed through into the charge

VUC will be affected by:

- Network Rail’s plans for CP6, including on efficiency
- It is also reviewing the scope of costs within the VUC, to identify whether all of the items in the calculation should be there
- ORR will be considering the case for transitional arrangements (‘caps’ on VUC)

Network Rail will publish a draft price list in February 2018 Background and structure

- On 28 September 2017 we published a consultation setting out proposals on charges which recover fixed network costs (i.e. Network Rail’s costs that do not vary with use in the short-term)

- The aim of this consultation is to progress our work to calculate charges recovering fixed network costs for CP6 (we have called these *infrastructure cost charges*)

- These slides cover:

  - Overview of infrastructure cost charging approach
  - PR08 & PR13 market can bear test
  - PR18 freight market can bear analysis Infrastructure costs charging approach

Key components of infrastructure cost charges calculation

- **Cost allocation methodology**

  - To calculate infrastructure cost charges, we need to determine the level of fixed costs which are allocated to different (types of) services. This would form the upper bound for any infrastructure cost charge, with the actual level of the charge also being informed by the market can bear test.
  - Network Rail is currently consulting on its new methodology.
  - Before deciding whether to implement the new cost allocation methodology, we would consider the responses to Network Rail’s consultation.

- **Market can bear test** – this is the subject of our consultation and discussed in more detail in these slides. PR08 & PR13 market can bear test for freight services (1)

Background:

- **PR08** - introduced the **freight only line charge** and undertook a market can bear assessment to identify which services (market segments) would pay it, and how much they would pay.

- **PR13** – introduced the **freight specific charge** and updated the market can bear test in order to levy this charge (in addition to the FOL).

Market can bear test – approach:

- Based on the provisions in the Access and Management Regulations, and taking into account our statutory duties, we developed a **four-part test to assess what the market can bear for freight services**:

  1. **Impact on rail freight market** – assess the impact of a mark-up on the size of the freight market (all other factors held constant).

  2. **Impact on future growth** – consider the impact of a mark-up on future growth of the rail freight market (based on industry forecasts of growth).

  3. **Impact on operator profitability** – one indication that the market cannot bear a cost increase is that it would cause an efficient operator to withdraw or not to enter the market. Therefore, one consideration as part of the market can bear test is assessing the potential impact of an increase in charges on freight operator profits (limited data available).

  4. **Other impacts** – assess the impact of a mark-up on the environment from the transfer of traffic from rail to road. PR08 & PR13 market can bear test for freight services (2)

Impact on rail freight market

- Key focus of the analysis was on determining whether there is a significant risk that the mark-up could result in the exclusion of use of the infrastructure by the market segment. We did this by looking at:

  - Elasticity of demand
    - How demand for rail freight might fall or raise as a result of higher charges
  - Extent to which the market competes with road
    - Because a switch to road may be inefficient

- We determined that we would not levy a charge on any market segment that is not both highly inelastic and faces little competition with road

  - This is a cautious approach to interpreting the legislation (which focuses on exclusion of a whole segment) PR18 market can bear test for freight services

Our June 2017 decisions on infrastructure cost charges for freight services:

- Continue levying charges to recover fixed network costs from freight services, subject to a market can bear test
- Combine the FSC and FOL charges into a single freight
- Update the market can bear test which we undertook in PR13, to reflect any new information and changes in the market

Scope of the PR18 update of the freight market can bear test:

- Reviewed the current market segmentation and proposed retaining this for CP6
- Consider ability to bear based on existing segmentation (based on commodities) – this involves assessing whether any changes in the relevant markets have materially affected our previous assessment of ability to bear Based on the analysis undertaken by our consultants, we have set out in our consultation the following initial proposals around which market segments appear to have the ability to bear infrastructure cost charges in CP6.

| Commodity | CP5 | Key evidence | PR18 proposal | |--------------------|----------------------|------------------------------------------------------------------------------|---------------------------------------------------| | ESI coal | Paying FSC & FOL | - Coal traffic has been declining in CP5 (as expected but happening faster than anticipated)\
| | - Driven by government policy rather than charges\
| | - Charges continue to be a small proportion of transport costs for coal | No change | | Biomass | Not paying FSC & FOL (but we said we would review this decision in PR18) | - Has become an established part of UK energy mix (and volumes transported by rail have grown)\
| | - Large power stations are in receipt of subsidies and rail has a substantial cost advantage compared with road transport\
| | - Significant rail-specific investment by existing participants\
| | - Potential for new entry restricted by uncertainty over future subsidies and concerns around environmental sustainability | Subject to infrastructure cost charges | | Iron ore | Paying FSC & FOL | - UK steel production overall has been suffering from low profitability in recent years\
| | - Competition from other modes in terms of the transportation of iron ore remains very low | No change | | Spent nuclear fuel | Paying FSC & FOL | - No significant changes were identified in the position of spent nuclear fuel | No change | Next steps

**ORR consultation will include:**

- Emerging views on market segmentation for passenger services
- Proposals on market segmentation for freight services & initial view on market segments able to bear infrastructure cost charges in CP6
- Approach to levying charges on passenger operators

**29 June – ORR conclusions letter on charges and incentives**

**22 September – NR consultation on cost allocation methodology**

**28 September – ORR consultation on infrastructure cost charges**

**NR publishes draft price lists for CP6**

**NR concludes on cost allocation methodology consultation**

**(Tentative) ORR concludes on some elements of September 2017 consultation**

**ORR Draft Determination**

Set out final proposals (for consultation) on:

- Whether to base fixed cost charges on NR cost allocation methodology
- Market segmentation for passenger and freight services
- Level of mark-ups for each market segment
- Design of fixed cost charges Freight and National Passenger Operators

Paul McMahon MD, FNPO

ORR Freight Customer Event 2 October 2017 Outline

- FNPO overview

- Freight traffic

- Scorecard

- Business development

- CP6 plan

- Capital enhancements FNPO and Network Rail operating model

- “Ninth operational route” or “virtual route”

- Principal point of contact with customers who operate over multiple routes

- Work closely with rail freight end users

- Do not physically operate infrastructure but are accountable for outputs

- New FNPO organisational structure established with additional resources

- FNPO Route and 7 customer scorecards

- Will establish a Route Supervisory Board Our Purpose To deliver growth and excellent service for our customers and our stakeholders, through improving safety and performance, and enhancing capacity and capability, at an efficient cost.

• Our Priorities for freight • ① Deliver safe, reliable and efficient performance. • ② A strong customer focused and collaborative approach with our customers and stakeholders. • ③ Embed and develop the new FNPO organisation as part of wider Network Rail transformation. • ④ Identify and provide network capacity and capability necessary to support our customers needs. • ⑤ Undertake business development to generate traffic growth for the freight sector and income for Network Rail. • ⑥ Produce a robust CP6 strategic plan including proposals for sustainable freight track access charges. Actual and forecast rail freight volumes moved FNPO Route Scorecard for 2017/18 (at P5)

| Route Scorecard - FNPO | Period Business Review | |------------------------|------------------------| | **Safety** (AIP 20%) | **Period** | | Lost time injury frequency rate (LTIFR) | Actual | Target | Actual | Target | | Close calls raised | 2.0% | 0.00 | 0.15 | 0.00 | 0.15 | | YTD close calls closed within 90 days | 2.0% | 100% | 100% | 90% | 90% | | Delays | 5.0% | 2 | 1 | 5 | 5 | | SPADs | 5.0% | 2 | 3 | 22 | 15 | | Safety hour attendance | 2.0% | 75% | 6% | 78% | 67% | | Operator staff lost time injuries on NR infrastructure | 4.0% | 1 | 1 | 5 | 5 | | **Financial Performance** (AIP 20%) | **TTD** | **PFP** | **Worse than Target** | **Better than Target** | **PFP Achievement** | **PFP Weighted Achievement** | | Freight truck access income (£m) | Actual | Target | Actual | Target | PFP | Worse than Target | Target | Better than Target | PFP Achievement | PFP Weighted Achievement | | Operating expenditure - Variance to budget | -112% | 0% | -32% | 0% | 0% | 10% | 0% | -30% | 0% | 2.50% | | **Investment** (AIP 10%) | **CPS SfN schemes - Current year GJ&P completion vs baseline** | **CPS SfN schemes - Current year GJ&P completion as baseline** | | Actual | Target | Actual | Target | PFP | Worse than Target | Target | Better than Target | PFP Achievement | PFP Weighted Achievement | | Freight Delivery Metric (FD M) - National | Actual | Target | Actual | Target | PFP | Worse than Target | Target | Better than Target | PFP Achievement | PFP Weighted Achievement | | Right time departures - Freight | 80.7% | 80.0% | 81.3% | 80.6% | 81.3% | 78.0% | 80.0% | 82.0% | 78.0% | 2.33% | | TOC on TOC delay (Delay Minutes/JDC train km) | 1.31 | 1.18 | 1.00 | 1.18 | 1.13 | 1.34 | 1.18 | 1.15 | 1.00% | 1.00% | | NR cancellations - Freight | 0.36% | 0.31% | 0.31% | 0.31% | 0.25% | 0.41% | 0.31% | 0.36% | 0.36% | 1.00% | | Cross Country - PNR | 51.8% | 50.0% | 89.5% | 89.7% | 89.7% | 99.8% | 99.8% | 100% | 100% | 2.00% | | Cross Country - CML | 2.56% | 3.55% | 3.84% | 3.90% | 3.85% | 4.05% | 3.95% | 3.85% | 3.85% | 2.00% | | Caledonian Sleeper - Right time arrivals | 53.5% | 35.6% | 82.4% | 75.6% | 79.4% | 72.0% | 75.6% | 75.6% | 2.00% | | **Customer Measures** (AIP 20%) | **PFP** | **Worse than Target** | **Better than Target** | **PFP Achievement** | **PFP Weighted Achievement** | | Freightliner - Roll up of customer scorecard | Actual | Target | Actual | Target | PFP | Worse than Target | Target | Better than Target | PFP Achievement | PFP Weighted Achievement | | Freightliner - Roll up of customer scorecard | 4.0% | 42% | 92% | 0% | 0% | 50% | 100% | 0% | 0.00% | 0.00% | | **People Measures** (AIP 12%) | **Performance management conversations** | **PFP** | **Worse than Target** | **Better than Target** | **PFP Achievement** | **PFP Weighted Achievement** | | Actual | Target | Actual | Target | PFP | Worse than Target | Target | Better than Target | PFP Achievement | PFP Weighted Achievement | | 100% | 80% | 90% | 97% | 95% | 80% | 90% | 90% | 90% | 1.00% | 1.00% | Freight sector safety collaboration

We are collaborating more closely with FOCs to drive safety improvement

- Freight sector collaboration leading to ‘Integrated Plan for Safety’
- All FOCs aligned with Network Rail at National Freight Safety Group
- RDG Freight Group endorsement for plan with leadership from Geoff Spencer (ex DBC CEO) Network Rail’s train performance delivery for freight remains strong. Arrivals to Fifteen

Arrivals to Fifteen (A2F), Period and MAA values

A2F (%)

Period

2014/15 2015/16 2016/17 2017/18

A2F % A2F MAA % Arrivals to Fifteen – failures waterfall

National Freight MAA A2F failures to Period 1805 by JPIP category code (alphabetically)

Current A2F/MAA value 85.7%, with proportional number of delay failures (circa 33,000 excluding SV&C events) Supporting efficient growth

We are running more longer and heavier trains to support freight traffic growth

- 34 ‘Service Plan Review’ trials ongoing

- 12 SPRs progressed to permanent changes in last 2 years

- On average 10-15% increase in weight/length from SPRs FOCs and Network Rail have worked together to relinquish unused paths

- 52% (5,079) of unused freight paths have been relinquished from the weekly timetable

  - 3,947 paths have returned to white space
  - 1,132 paths have been retained as Strategic Capacity

- Relinquished capacity has been used by other operators for new services We have sponsored a Control Room at the Port of Felixstowe to drive operational performance improvements - Involving Port, FOCs, TOC, Anglia Route, FNPO As part of FNPO transformation Head of Business Development role established (a refinement of Head of Market Development) - to continue engagement with sector plus added focus to explicitly identify third party funding opportunities to capture some of the economic value that improved railways create

- Head of Business Development – Guy Bates

- Business Development Manager (North) – David Young

- Business Development Manager (South) – Ed Wilson

Opportunities in:

- General freight traffic growth

- Terminal developments and property income

- Development of enhancement schemes

- Third party contributions for enhancements

- Relationship management and NR reputation Freight Network Study – future

- £800m of specific freight investment delivered / planned 2009 – 2019, including:

  - Gauge enhancement, train lengthening & diversionary route Southampton – Midlands
  - Ipswich Chord & Ipswich Yard capacity
  - Nuneaton North Chord
  - East Coast Main Line W12 gauge clearance
  - Great Western Main Line W12 gauge clearance of the Severn Tunnel
  - Thames Gateway Level Crossing enhancement
  - Felixstowe Branch capacity FNPO CP6 plan

- We are developing a robust CP6 plan

- Aligned with but different from (scope & scale) geographical route plans

- Good collaboration with customers / stakeholders

Key issues:

- Updating freight demand forecast
- Geographical route and FNPO plan alignment
- Establishing money flows for FNPO
- Specific capacity enhancement plans
- Freight access charges >> parallel discussion with ORR and DfT/TS on access charge stability Our Purpose To deliver growth and excellent service for our customers and our stakeholders, through improving safety and performance, and enhancing capacity and capability, at an efficient cost.

CP6 Priorities • Continue to deliver safe and reliable performance • Maintain and improve network capacity and capability on our key customer operational routes • Identify and deliver business development opportunities to support growth

Plan Principles • Work collaboratively with customers, stakeholders, Routes and SO • Aligned scorecards will be at the heart of our relationships and delivery • Efficiencies will be achieved through our ‘Better Every Day’ plan which focuses on process improvement and people development

FNPO Overview • Established in 2016 as Network Rail’s ninth operational route • Do not physically manage infrastructure but accountable for outputs • FNPO customers are national operators who collectively operate around 1000 trains per day across the network • Strengthened team to support and promote our customers’ interests

Key objectives\*

| | CP5 exit (18/19) | CP6 exit (23/24) | |----------------------|------------------|------------------| | Derailments | 10 | 5 | | SPADs | 40 | 35 | | Customer staff LTIs | 12 | 7 | | Freight variable income | £49m | £59m | | Freight Delivery Metric | 94.4% | 94.5% | | Freight Average Speed | 25 mph | TBC | | CrossCountry PPM | 90.8% | 91.0% | | Cal Sleeper RTA | 80.0% | 80.0% |

- Draft CP6 forecasts of total freight lifted

Historical and forecast total rail freight tonnes. FMS & revised 2023/24 forecast scenarios

Actual

FMS-based forecast of 2016/17

FMS

Sc B2

Sc B3

Sc A2

Sc A3

Sc D2

Sc C2 Historical and forecast rail freight tonnes. Not inc ESI coal FMS & revised 2023/24 forecast scenarios

Actual

FMS-based forecast of 2016/17 ORR protects the interests of rail and road users, improving the safety, value and performance of railways and roads today and in the future

Access

Gordon Herbert Access manager, ORR Access

ORR’s remit includes:

- National network access

  - Passenger and freight

- Facilities

  - Ports, terminals, depots, yards, stations…

- Connection contracts

- Agreed and disputed agreements

- Access appeals

- Network Code appeals

- Access policy and guidance Current work

- **Freight access team**

  - Gordon Herbert, Katherine Goulding, Margret Child.

- **Access policy**

  - Access on an increasingly busy network
  - Strategic capacity
    - SFN, European freight corridors, return of unused rights

- **Freight Facilities**

  - Revising our general approval
  - Encouraging investment
  - New guidance
  - European legislation New legislation

- The Railways (Access, Management and Licensing of Railway Undertakings) Regulations 2016.

  - Replaced 2005 Regs
  - Access, charges, infrastructure, appeals.
  - NR Network statement

- Implementing Regulation on access to service facilities and rail-related services

  - ☑ transparency is a prerequisite for access
  - ☑ non-discrimination
  - ☑ need to optimise best use of assets
  - ☑ I am at full capacity so may refuse access
  - ☑ I do not have to invest £s to meet demands of an applicant
  - ☒ I am a private facility and so exempted [all SFs are included].

- See Regs and ORR guidance. Safety Matters

Patrick Talbot HM Principal Inspector of Railways

ORR Freight Customer Event, 2 October 2017 Health and Safety Matters

- HM Railway Inspectorate

- ORR Freight Team

- Emerging Issues Health and Safety Matters

- HM Railway Inspectorate

  - Over 175 years old!
  - Part of ORR
  - c. 100 staff

- It's our responsibility to ensure that those responsible make Britain's railways safe for passengers and provide a safe place for staff to work

  - Certification
  - Inspection
  - Investigation/ Enforcement Freight Team

- Dedicated Freight Team to lead safety regulation activities with Freight dutyholders

  - FOCs
  - Entities in Charge of Maintenance
  - Other dutyholders- e.g. terminals/ customer sites (Possibly!)
  - Engages with industry at a strategic level- NFSG

- For non- FOC sites the enforcing authority may be either the HSE or ORR

  - Different enforcing authorities for different activities
  - Tends to be dealt with on a case by case basis Unauthorised Access to Railway Infrastructure

- June 2017 - Two serious incidents

  - Young people have gained access to railway infrastructure and come into contact with live OHLE
  - Both incidents have occurred at freight facilities
  - Incident 1: Serious burns
  - Incident 2: Fatal injuries

- Incidences of trespass are likely to increase over school holiday periods Unauthorised Access to Railway Infrastructure

- The Law requires dutyholders to take reasonably practicable measures

- Carry out a suitable and sufficient risk assessment

- Implement suitable arrangements, taking into account;

  - The hazards present on the site, such as moving rail vehicles and the presence of railway electrification systems;
  - The local environment, for example, the proximity of houses, schools or playing fields; and,
  - Any previous history of trespass and vandalism at the site

- Robust monitoring and review Unauthorised Access to Railway Infrastructure

- No “one size fits all” solution

- The prevention of unauthorised access to railway infrastructure is an issue that requires the input of all railway stakeholders, however...

- ...all dutyholders have a legal responsibility

- Are you doing enough?